Is Intel a Dead Money Investment?

The slowdown in the PC market has not been good for many companies. While the likes of NVIDIA (NVDA) have managed to dodge the slowdown by diversifying its business, companies like Intel (INTC) have struggled. The struggles have been frustrating for long-term investors, however I think they may be about to end as Intel’s future is looking bright.

Over the decades, Intel has been using the same tick-tock chip production cycle. Recently, the company proclaimed in its 10-K filing that it decided to shift towards a three-step development process instead.

At the time of “tick” release, the company launched a smaller micro-architecture comprising a new manufacturing process, whereas, at the time of “tock” launch, the microprocessors were upgraded, but the size was same.

The tick-tock strategy gave rise to Moore’s Law, according to which the number of transistors on the same silicon area will double in every two years. Moore’s Law accounts for the reason to keep Intel at the leading position in the PC and server chip markets. But with time, it has become much difficult to place more transistors on the chip.

Intel’s new model fundamentally adds an additional optimization stage at the end of tick-tock cycle. The company’s latest and newest generation chips are based on 14 nanometre process. The company steered in that generation in 2014 with Broadwell architecture, and later it upgraded that architecture to Skylake previous year. And now, Intel will optimize the 14 nanometre design with Kaby Lake at the end of this year.

The company claims that upgrading its previous model does not mean that Moore’s Law has ended. However, Moore’s Law is a marketing and business strategy instead of an actual scientific law. The good news for Intel investors is that it the company still makes the best in class chips for PCs and servers. The company holds a leading position in the x86 segment followed by the only tough competitor Advanced Micro Devices. However, Advanced Micro Devices latest generation of Bulldozer CPUs failed to meet public expectation and was less efficient than Intel’s in terms of single-threaded performance.

The new technology should help overcome several headwinds and should also benefit Intel’s profitability in the long-run. However, in my opinion, the company should focus more on diversifying its business as so far, the company has struggled to enter into new markets. While I wouldn't say Intel is a dead money investment, I think the company's future depends wholly on its ability to diversify.